That other important speech (Bernanke’s)

Federal Reserve Chairman Ben Bernanke spoke in Minneapolis today, almost exactly three years after the panic phase of the Great Recession started. He reminded the audience that recent data show that the recession was worse and the recovery weaker than first thought. Yet what everyone wants to know is what the central bank will do to prevent the economy from falling back into recession?

Unfortunately, Bernanke said little more than he did at his speech last month at Jackson Hole. Things are bad. Fiscal policy needs to be more robust. The central bank has the tools and stands by to act. Unlike many, me included, Bernanke and his advisers see the recovery slowly regaining steam, especially with the positive balance sheets in corporate America. What he didn’t say was that the Fed’s policy setting committee is divided over the path ahead, and this will complicate its meeting on Sept. 20th and 21st. Some want an aggressive easing (QE3) and others fear inflation.

Here are some interesting tidbits from the speech:

— “One striking aspect of the recovery is the unusual weakness in household spending. After contracting very sharply during the recession, consumer spending expanded moderately through 2010, only to decelerate in the first half of 2011.”

— “Even taking into account the many financial pressures they face, households seem exceptionally cautious. Indeed, readings on consumer confidence have fallen substantially in recent months as people have become more pessimistic about both economic conditions and their own financial prospects.”

— “The recession, besides being extraordinarily severe as well as global in scope, was also unusual in being associated with both a very deep slump in the housing market and a historic financial crisis. These two features of the downturn, individually and in combination, have acted to slow the natural recovery process.”

— “I do not expect the long-run growth potential of the U.S. economy to be materially affected by the financial crisis and the recession if — and I stress if — our country takes the necessary steps to secure that outcome.”

To me (and probably most economists) that means serious short-term stimulus, especially for infrastructure, and then deficit reduction once the economy is growing. But this is a key point of disagreement in D.C. Reading between the lines, we see a Fed that’s sidelined, and perhaps saving its ammo for a potential Eurozone financial meltdown.

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